Date | Feb 07, 2016:
Commodity prices are on a downward spiral globally, with new lows being recorded everyday. Metal and mining company stocks have taken a beating. Large coal miners, such as Arch Coal, the US’s second-largest miner, are bankrupt. While it is certainly premature to call a bottom for the sector, the gloom offers some promising bets for long-term investors.
One such is state-owned coal major, Coal India (CIL). Its stock trades at 15 times trailing 12-month earnings, in the mid-range of its three-year historical average of 14-16 times. The company has ample coal reserves — proven reserves of 52 billion tonnes and extractable reserves of 22 billion tonnes (about 44 years of life, based on current output levels of 500 million tonnes per year). Its supply dominance — accounting for 80 per cent of the country’s coal output, as well as robust operating margins — of over 20 per cent, will aid long-term prospects.
CIL also holds an enviable cash reserve of ₹54,000 crore as of September 2015, to fund expansions.
Good thing going
While coal prices have been cut in half globally in the last five years, the company’s revenue is insulated — domestic prices are not linked to global rates and are currently cheaper than equivalent import prices by 20-30 per cent. Sale price has not been revised upwards since 2013 and about 80 per cent of sales are to power companies through fuel supply agreements.
Also, the company auctions coal at higher prices to aluminium, steel and cement producers. Prices are currently subdued due to low import prices and downturn in the customer industries. But revenues will get a boost once volumes pick up as these sectors revive.
Many of the issues that have historically haunted CIL are also easing. One concern was slow production growth — coal output increased 2.8 per cent on average in the five-year period of 2009-14, lagging demand growth of about 5 per cent. But thanks to the measures put in place last year, production has been ramping up briskly. During April-December 2015, production increased 9.1 per cent year-on-year. With brownfield and greenfield expansions, CIL will be able to beat its historical growth rate.
Higher output has stoked fresh concerns about slowing demand from power plants. However, over the long term, power production and, hence, coal fuel demand is likely to be robust for sustaining economic growth. Sales growth will be helped by the expedited construction of three railway links in the next five years. The company also faced quality complaints but with additional coal washeries and third-party inspection, these problems are being addressed. Better quality will also boost sale price realisation.
(Source: http://www.thehindubusinessline.com/)